Question re: 8% rule

[moparcanuck]

Okay, we all know the 8% rule whereas the annual rent from a property should equal at least 8% (or even better 10%) of the price of the property. I've often pondered how other investors take into account two items that would affect the validity of the rule.



1. Condos. Condos inevitably come with a condo fee. I've found a lot of properties that at first glance look awesome (often in excess of 10%), but when taking into account the condo fee, pushes the cash flow WAY down. Even worse, for those times when the place is vacant, that's another fixed cost that you can't even say eventually goes away like a mortgage. I tend to look more at townhouse condos rather than apartment style, but those condo fees can put a bit bite in the cash flow. Thoughts?



2. Older vs. newer properties. Often when a property meets the rent/cost rule, it's an older property. My places tend to be newer, but I don't have a problem with an older place as such. However, do other investors not find that as the property gets older, there are more repairs (some minor like drippy faucets, others more major like new furnaces and roofs and such). Certainly, if all were equal (which it isn't), a newer property with the same rent and the same cost would be a better buy than an older one. How does one adjust for this? Are people finding newish properties that meet the rent/cost rule, especially in Alberta? Maybe I need a little further insight into screening.



I'm on the hunt for my next property, and seem to have two kinds of properties that pop up. Either newer/nicer ones that would have trouble meeting the rule, or older ones that seem to meet nicely, but I worry about excessive repairs driving it cash flow negative.



Any insight?

 

[ChrisDavies]

1. If you're buying condo, you have condo fees instead of a big chunk of repairs and maintenance. If you buy SFH's, then you have big maintenance, and no condo fees. If you're buying well managed projects, you come out even or a little ahead thanks to the economies of scale.



2. I like properties built before 2000, as when nicely renovated you get essentially the same rent, but don't pay the premium for brand new properties. Every property, area and age is different, but you're right about seeing more major repairs. The cost of age is typically taken into consideration in the purchase price though. Cheaper price, same rent = better yield.

 

[Thomas Beyer]

a few comments:



a) avoid condos .. unless rental pooled and well below $150,000 .. better less than $120,000 or so

b) older, smaller houses or older townhouses are great starter properties: they rent well .. and you don't have to worry too much about renters doing damage .. maybe in the mid 100's to mid 200's range .. anything above $250,000 is a specialized property that may work in select circumstances as an executive rental or student rental

c) newer properties, on average, make sense ONLY as an appreciation play with severe negative cash-flow for years until sold ..

d) to get cash-flow even option b) usually requires 25% down .. or often 30%+ .. but then it can be an excellent long term and safe investment when selected with care and managed impeccably

 

[Hutchym]

Thank you for all the input guys!! I found this post to be very helpful. I am currently looking at an older home (100 years) priced significantly lower than other homes in the area (less than 2/3 price). It needs work and it is laid out much different than the homes of today. I am willing to put a few thousand in to bring its value up. Its a relatively simple 3 bedroom, two bath, 1 1/2 storey home. Here is another question however. If the master is on the main floor, and the two smaller bedrooms are upstairs, is this property going to be a desireable property? I would not want to have a house that is laid out that way. However, a tennant whom may only be looking for 2-3 years of living arrangements may not care? My plan is to find a younger family to rent the space. The cash flow would be good. Finding the tennants may or may not be harder with the home. Let me know what you think.



Mike

 

[Thomas Beyer]

[quote user=Hutchym]Thank you for all the input guys!! I found this post to be very helpful. I am currently looking at an older home (100 years) priced significantly lower than other homes in the area (less than 2/3 price). It needs work and it is laid out much different than the homes of today. I am willing to put a few thousand in to bring its value up. Its a relatively simple 3 bedroom, two bath, 1 1/2 storey home. Here is another question however. If the master is on the main floor, and the two smaller bedrooms are upstairs, is this property going to be a desireable property? I would not want to have a house that is laid out that way. However, a tennant whom may only be looking for 2-3 years of living arrangements may not care? My plan is to find a younger family to rent the space. The cash flow would be good. Finding the tennants may or may not be harder with the home. Let me know what you think.



Mike




for a 100 year old house property inspection is CRITICAL .. as some MAJOR MAJOR expenses may be required: new plumbing, new beams, new windows, new siding, new electric wires.. and depending on inspection report is may be very hard to finance.



Get it under contract with at least 3 weeks due dilligence .. then do DD and get bank to approve mortgage .. then decide if it is worth it !



It may be worth ONLY what the lot is worth.



Therefore, it may make a good rental property .. and then sell as a lot (i.e. a tear down) in a few years !

 

[Stephen1151]

Also be aware of the type of insulation that was used. Aspestos can cost alot in environmental disposal fees.

 

[moparcanuck]

Thanks for all the input guys!



I guess one thing to clarify, because it's going to be different for each of us, is what I would consider an 'older' or 'newer' house. Myself, given my area, I pretty much call anything older than mid-60s as an 'older' house, and anything newer than around 1990 as a 'newer' house. Those are of course, very soft and movable definitions, even for me. I'm sure they can move as well depending on your area. In Alberta, there aren't a lot of hundred year old houses, but I'm sure out east they're very common.



I've tried to steer a bit clear of older houses, because even without repairs, there seems to be a lot of potential problems. Asbestos, aluminum wiring, formaldehyde insulation. The insurance company that I've been dealing with thus far has even provided a checklist for me for older houses. If it's older, they'll want an inspection, and even things that are overall harmless, but just not up to today's standards, they either won't insure or they'll want a full FULL inspection on it (ie, 60 amp main service. Very standard 40 years ago, but today, 100 amp is minimum, starting to see 200 amp. Nothing WRONG as such with 60 amp, just can't run as much stuff in the house without blowing breakers).



Maybe I'm just paranoid, but I do worry about buying a positive cash flow property, then immediately having to put major repairs in right away, pushing it deep into the red. Of course, always get a home inspection, but they're not bullet proof. Had that issue when we bought our own house. Shingles were certainly getting toward the end of their life, and we knew it. Inspector figured we had probably 5 years left in them. Turns out it was 5 months. Once bitten, twice shy



I know a lot of people here are from Alberta (specifically Edmonton/Calgary/between). Are there indeed still properties that can meet the 8% (of course, preferrably 10%) fule without being run down properties in questionable neighbourhoods? I know the 8% rule used to be the 10% rule. Starting to wonder if it should be modified again, or maybe it's just me.



Thanks again everyone! Always love stopping in to share thoughts.

 

[Thomas Beyer]

[quote user=moparcanuck]... Are there indeed still properties that can meet the 8% (of course, preferrably 10%) fule without being run down properties in questionable neighbourhoods? I know the 8% rule used to be the 10% rule. Starting to wonder if it should be modified again, or maybe it's just me.





8% on a house that costs $300,000 assumes $2,000/month in rent, for example. Does this exist ?



Hard in viable cities or neighborhoods for single-family properties.



yes also for smaller towns and also less viable markets with add'l rental risk and usually less equity upside and less liquidity. Some folks have done real well in small towns !



Yes for multi-famliy .. as a gross-rent-multiplier (GRM) for multi-family even in top cities like Edmonton or Calgary is 10-12 (i.e. 8% to 10% using this formula) .. or 6-9 for smaller cities, i.e. well above 10% ! [That's why we do multi-family]



Better is to look for houses that cost $200,000 to $250,000 (or less) and that rent for perhaps $1200 to $1500, say townhouses or smaller houses. $1500*12 = $18,000/year which is more than 8% of $200,000 but less than 8% of $250,000 !

 

[wgraham]

Re: 8% rule.



I have found some data that is going to be a gold mine for Rein members. I have been able to source a large amount of data that will compair rents in any given neighbourhood to values based on property type. This is the data that I started looking for when I first became a member and it is finally available for Calgary!



I will be presenting it at a meeting in the not too distant future. It should give you a great idea of where the 8% rule makes sense and the areas that out perform the rest of the city! This will take you to the next level!!

 

[kboughen]

The 8% rule is just the initial filter. It is a quick and easy way to eliminate properties that are not going to work. You are absolutely correct that once a property passes the 8% rule you need to dig down into all the details to see if it really is a good investment. Congratulations on putting in the effort required to make a good investment decision.